Overdraft fees add to the pain when funds run dry

Financially strapped consumers who frequently end up overdrawing their checking accounts can pay more than $400 a year in overdraft fees on transactions involving their debit and ATM cards, according to a report published this month by the Consumer Financial Protection Bureau.

Consumers must voluntarily sign up for overdraft coverage for point-of-sale purchases with a debit card or transactions using the ATM. But signing up — without understanding how fees can be triggered — has an extra cost, consumer advocates say.

The reason? Many younger and struggling consumers tend to use their debit cards more frequently and generate more overdraft fees than others. Unlike consumers on stronger financial footing, they don’t have cash in hand and often cannot use a credit card to cover daily bills or pull themselves out of a jam.

Consumers spend about $15 billion a year in overdraft fees. About 9 percent of checking accounts are held by consumers who are viewed as “frequent overdrafters” — those who attempt to overdraw their accounts more than 10 times in a 12-month period, according to the federal watchdog agency.

People who face repeated overdraft fees paid 79 percent of all overdraft fees.

The agency reviewed data from more than 40 million accounts at several large banks nationwide. It plans to roll out a new “Know Before You Owe” disclosure to help consumers better understand the costs of overdraft fees and how those fees are triggered.

The Consumer Financial Protection Bureau will be doing more testing of four sample disclosures and is seeking comments from consumers. The bureau did not propose regulatory amendments upon publishing its report and did not release any timeline for potential rule making.

Under federal regulations that went into effect in 2010, banks cannot charge overdraft fees for debit purchases and ATM withdrawals without a consumer’s earlier consent via what’s called an “opt-in.”

Often, a representative at the bank or credit union will put a piece of paper in front of a consumer to opt in for coverage relating to a debit card. Many consumers agree to such coverage because they don’t want to be embarrassed by being turned down for a purchase if their account is running a tad short.

But many consumers don’t realize there is no fee for a declined debit card transaction or ATM transaction — if you don’t opt in.

Consumer advocates maintain that overdraft fees have turned into a “highly lucrative profit center” for some financial institutions. Consumers, of course, have more than one way to rack up overdraft fees. It’s possible to overdraw accounts via online bill payments or automatic payments for utilities and other bills. Fees relating to these types of overdrafts could be charged even if the consumer does not decide to opt in for debit card and ATM coverage.

A bank or credit union can reject a check or an online bill payment if there isn’t enough money in the account and charge a fee for insufficient funds. Or, if the financial institution covers the transaction, it can charge the consumer an overdraft fee.

“An overdraft occurs when consumers lack the funds in their account to cover a transaction, but the bank or credit union pays it anyway,” bureau director Richard Cordray said in a media call last week, when the report was released.

“This practice gives consumers access to funds, but at a cost,” Cordray said.

The fee for each overdraft can be about $34 and is required to be paid with deposits into the account. It’s possible with some small debit card purchases — say $25 for groceries — to end up triggering a $34 overdraft.

Fees add up, too. The agency said those who frequently overdraft an account and opt in for debit card and ATM coverage are charged 18 fees per year, compared with five for those who do not opt into the coverage but paid overdraft fees.

Many people who are hit with one overdraft after another do not have much wiggle room. Vulnerable consumers may have an average balance at the end of the day that’s less than $350, according to the consumer protection agency.

By contrast, someone who rarely sees an overdraft fee typically has an average checking account balance of more than $1,550 — which would provide far more cushion for mistakes or emergencies.

The Consumers Bankers Association said many consumers who don’t have much money, though, find overdraft protection helpful.

“With nearly half of Americans unable to meet a $400 emergency expense, overdraft is a voluntary service which provides consumers access to short-term liquidity,” said Richard Hunt, president and CEO of the Consumer Bankers Association in a statement.

Hunt noted that a 2015 Novantas study found that 99 percent of consumers who opt-in to overdraft protection for point-of-sale debit card purchases and ATM services said they were not confused by the current opt-in process.

Often, financially strapped consumers cannot simply pull out a credit card because they don’t have one. Or they might not be able to qualify to open a new card to cover a necessary big-ticket purchase.

Consumers who tend to face several overdraft fees generally have median credit scores that are less than 600 — well below what’s viewed as a subprime score, according to the federal watchdog agency.

The lower the score, the harder it is to obtain a new credit card.

“When every penny counts, people need to understand how overdraft works,” Cordray said.

Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com.